0:07Skip to 0 minutes and 7 secondsIn this step, we're going to try to put together some of the big pieces of the puzzle that we discovered in the first week, when we heard so many different voices about globalisation. And in the second week, we went through the long history of globalisation. What I want to do is invite you to think about globalisation in a broader perspective that is not just about more goods crossing borders, but more complex. Let me show you with this graphic here.

0:38Skip to 0 minutes and 38 secondsI'd like you to focus on three types of costs that form three constraints on globalisation-- trade cost, which is the cost of moving goods; communication costs, which is a cost of moving ideas; and face-to-face costs, which is the cost of moving people. Now, these are constraints in the sense that when any of these three costs are high, it is difficult to produce things in one country and sell them in another, which is trade. They're a hindrance, in some sense, to goods, ideas, and people crossing borders. So they're constraints.

1:13Skip to 1 minute and 13 secondsNow, the broader perspective on globalisation is going to take these down one at a time and show that moving them down one at a time explains the broad development of globalisation from the 19th century, from 1820 or so. Let's start with 1820. As we saw, that was the beginning of phase three, the old globalisation. Around 1820, the steam revolution and Pax Britannica lowered the cost of moving goods. Pax Britannica was what the world became when Britain was a dominant power in the globe. And it used its navy to keep the world open to international trade. So we see the steam engine there, lowering the cost of moving goods. The cost of moving ideas and people fell much less.

2:08Skip to 2 minutes and 8 secondsThat had important implications. The lower trade costs drove an unbundling of production and consumption. And trade boomed as things were made in one country and consumed in another. But strangely, production micro-clustered locally as markets expanded globally. This was due to high communication costs, not high trade costs. What you see in this graphic is when they had a small world, because trade costs were high, factories were small. But when the world became large, when it became possible to sell to a global market, it became profitable to invest in very large factories with very large scales of production. But that involved production processes that were very complex.

2:56Skip to 2 minutes and 56 secondsThat complexity turned out to be much easier to organise when they were done within one building, sort of micro-clustered. So the fact that the trade costs came down, but the communication costs didn't come down, resulted in this clustering at a local level. That had dramatic effects, as we will see. The micro-clustering fostered innovation and launched a self-fueling cycle of innovation and modern growth. You see here on the left, you have little factories that are separated. When an innovation comes out of one of them, it doesn't go very far, and it sort of dies out. Imagine blacksmith in each village. They come up with a new clever thing.

3:41Skip to 3 minutes and 41 secondsBut since they're only making the nails and horseshoes for a few families, it's not that worthwhile investing it. Moreover, the idea dies, because it doesn't spread well. On the right, when the factory is there, you can get this bonfire of ideas, where many people are thinking about similar things. And because you're producing at global scales, it's really worthwhile investing those ideas to make the output higher quality and lower cost. That productivity itself leads to a growth trade-off, which leads to expanding markets, which makes it even more innovate. That's modern growth. There's this sort of synchronicity between innovation that leads to higher incomes, that leads to more demand for innovation, that leads to a continuation of the cycle.

4:29Skip to 4 minutes and 29 secondsNow, high communication costs meant that all this innovation in the G7 countries, the rich countries, stayed in the rich countries. And the result was the dramatic knowledge imbalances appeared. So if you see, on the left, the sort of pre-globalized world, knowledge was more or less evenly spread around the world. At the end of the old globalisation, with trade costs and micro-clustering, the knowledge was balanced heavily towards the rich countries. And since they had more knowledge per worker, their incomes were much higher. So in essence, the source of the great divergence was the bonfire of innovation that was started by the clustering that was allowed by the lowering cost of trade.

5:15Skip to 5 minutes and 15 secondsBut the innovation stayed local, stayed in the rich countries, because it was hard to move ideas. The result-- we've seen this graph a few times-- was the great divergence, where the G7 countries had the rising green dots, and India and China had the falling purple dots.

5:37Skip to 5 minutes and 37 secondsThings changed around 1990, with the revolution in Information and Communication Technology, ICT. It lowered the cost of moving ideas. Email, web-based platforms, Twitter, cell phones, all the information and communication technology, together with the processing power that could keep it going, lowered the cost of moving ideas across borders in a truly radical way. The lower communication costs made offshoring feasible. And vast wage differences made it profitable. So look at first this micro-cluster factory. That micro-cluster involves stages of production, which really weren't appropriate to rich countries. I'm going to tell you a quick story. My first trip to Japan was in 1987. I went to speak to Toyota Motor Corporation. And they showed me around the factory in Nagoya.

6:34Skip to 6 minutes and 34 secondsThe factory itself was a building that could hold 20 football fields, and we had to do the tour in a golf cart, because it was so large. Inside that factory, they did almost everything with the cars. And what wasn't done in the factory was mostly done in factories around it, in what was called Toyota City. That factory now has been spread all over Southeast Asia. That's in the right side there. They unbundled the factory. And things that were labour intensive, say, sewing leather seats on the cars of Lexus, were done in China or East Asia or Southeast Asia. And the whole process was coordinated through information and communication technology. That's a very common story now, offshoring, outsourcing.

7:33Skip to 7 minutes and 33 secondsTo ensure the offshoring of production, that it mesh seamlessly all together, the G7 firms offshored know-how along with the jobs. So what you see over here on the left is the know-how going around inside the factory. But once the offshoring happens, the light bulbs are moving across borders. In essence, the rich country firms were taking their know-how and combining it with low-wage labour in nearby developing countries. So the key part of that was that the know-how from the north was being combined with workers in the south. That was the big change-- know-how crossing borders, not just goods crossing borders. Now, that new high tech, low wage mix shifted manufacturing and know-how massively to a handful of developing nations.

8:24Skip to 8 minutes and 24 secondsAs we saw in the charts before, the manufacturing share of the G7 nations fell from about 2/3 to under half in just 20 years. And there were six rapidly industrialising nations that took that over. That led to a rebalancing of the know-how. And that was really what was driving the great convergence. In essence, the fact that you could now move knowledge across barriers allowed us to take knowledge from where it was abundant and take it to where it was scarce.

9:02Skip to 9 minutes and 2 secondsIn summary, what puts the new in new globalisation? ICT enabled rich nation firms to precisely control what goes on in developing nation factories. That gave them the possibility of moving their know-how and combining it with low-wage labour abroad. That's what was revolutionary. That's what put the new in the new globalisation.

A broader perspective on globalisation

This video uses a novel perspective on globalisation – called the Three Cascading Constraints view – to explain the key differences between Phase 3 of globalisation (the Old Globalisation) and Phase 4 (the New Globalisation).

For most of human history, economic life was organised at the village level. This changed when steam ships and railroads radically lowered the cost of long-distance trade and this, in turn, allowed production and consumption to separate. This was the beginning of what might be called the first unbundling of production and consumption – namely, the Old Globalisation.

Globalisation’s second unbundling – the long-distance separation of production stages (also known as the New Globalisation) – became economical when the ICT Revolution made it possible to organise complex activities at distance. To arbitrage the vast wage differences, G7 firms offshored labour-intensive stages of production. To keep the parts in sync, firms sent their know-how along so the flows of knowledge that used to happen only inside G7 factories had now become part of globalisation.

This, in a nutshell, is how the ICT Revolution changed globalisation. Up to 1990, globalisation was mostly about goods crossing borders, now it is also about know-how crossing borders.